Lewis Enterprises is considering relaxing its credit standards to increase its currently sagging sales. As a result of the proposed​ relaxation, sales are expected to increase by 5​% from 10,000 to 10,500 units during the coming​ year; the average collection period is expected to increase from 40 to 55 ​days; and bad debts are expected to increase from 2​% to 4​% of sales. The sale price per unit is $39​, and the variable cost per unit is $29. The​ firm's required return on​ equal-risk investments is 9.4​%. Evaluate the proposed​ relaxation, and make a recommendation to the firm.   ​(​Note:Assume a​ 365-day year.)   a. the cost from the increased marginal investment in​ A/R is? (round to nearest dollar) b. the cost from an increase in bad debts.? (round to nearest dollar)  c. compute the net profit from the proposed plan.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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 Lewis Enterprises is considering relaxing its credit standards to increase its currently sagging sales. As a result of the proposed​ relaxation, sales are expected to increase by 5​% from 10,000 to 10,500 units during the coming​ year; the average collection period is expected to increase from 40 to 55 ​days; and bad debts are expected to increase from 2​% to 4​% of sales. The sale price per unit is $39​, and the variable cost per unit is $29. The​ firm's required return on​ equal-risk investments is 9.4​%.

Evaluate the proposed​ relaxation, and make a recommendation to the firm.  

​(​Note:Assume a​ 365-day year.)
 
a. the cost from the increased marginal investment in​ A/R is? (round to nearest dollar)
b. the cost from an increase in bad debts.? (round to nearest dollar) 
c. compute the net profit from the proposed plan.
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